B.Voc.

Sem II
BVB – 204 Banking & Allied Services
Unit III – CRR & SLR and
procedure with reference to computation

Dr. Jivan Kumar Chowdhury

Cash Reserve Ratio (CRR)
 Reserve Bank of India(RBI) uses it monetary policy tools like
CRR, SLR, Bank Rate, Repo Rate, Reverse Repo Rate, MSF etc to
control inflation or deflation
 Cash Reserve Ratio (CRR) refers to the cash that all Scheduled
& Non-scheduled banks are required to maintain with RBI as
certain percentage of their demand and time liabilities (DTL).
 Demand liability of bank represent its deposits which are
payable on demand of the depositors – current and saving
deposits & time liability refer to its time deposits which are
payable on the specified maturities.
 To keep liquidity a bank has to keep regulatory cash reserve
with RBI. If the banks to fails to maintain CRR at prescribe
interval, it has to pay penal interest on the shortfall by
adjustment from the int. receivable on the balance with RBI.
 Objectives of Cash Reserve Ratio
 The Cash Reserve Ratio serves as one of the reference
rates when determining the base rate. Base rate means
the minimum lending rate below which a bank is not
allowed to lend funds. The base rate is determined by
the Reserve Bank of India (RBI).
 The rate is fixed and ensures transparency with respect
to borrowing and lending in the credit market. The Base
Rate also helps the banks to cut down on their cost of
lending to be able to extend affordable loans. Apart
from this, there are two main objectives of the Cash
Reserve Ratio:
 Cash Reserve Ratio ensures that a part of the bank’s deposit is with the
Central Bank and is hence, secure.
 Another objective of CRR is to keep inflation under control. During high
inflation in the economy, RBI raises the CRR to reduce the amount of
money left with banks to sanction loans. It squeezes the money flow in
the economy, reducing investments and bringing down inflation.
 How does CRR affect the economy
 Cash Reserve Ratio (CRR) is one of the main components of the RBI’s
monetary policy, which is used to regulate the money supply, level of
inflation and liquidity in the country. The higher the CRR, the lower is the
liquidity with the banks and vice-versa. During high levels of inflation,
attempts are made to reduce the flow of money in the economy.
 For this, RBI increases the CRR, lowering the loanable funds available
with the banks. This, in turn, slows down investment and reduces the
supply of money in the economy. As a result, the growth of the economy
is negatively impacted. However, this also helps bring down inflation.
 On the other hand, when the RBI wants to pump funds into the
system, it lowers the CRR, which increases the loanable funds
with the banks. The banks in turn sanction a large number of
loans to businesses and industry for different investment
purposes. It also increases the overall supply of money in the
economy. This ultimately boosts the growth rate of the
economy.
 Impact of CRR on liquidity:
 A cut in the CRR enhances loanable funds with banks and
reduces their dependence on the call and money market.
 An increase in CRR will squeeze the liquidity in the banking
system and reduce their lending operations and the call rate
will tend to increase.
 Present rate of CRR is 4 %.
Statutory Liquidity Ratio(SLR)
 SLR is maintained by all scheduled and Non-
scheduled in the form of cash in hand( exclusive of
the minimum CRR), current account balance with
SBI and other public sector commercial banks,
Unencumbered approved securities and gold.
 RBI can prescribe SLR from 0 to 40%. Present SLR-
18%.
 SLR has 3 objectives:
• To restrict expansion of bank’s credit
• To increase banks’ investment in approved securities
• To ensure solvency of banks
Impact of SLR
 The effect of an increase in SLR by RBI is the
reduction in the lending capacity of banks by pre-
empty a certain portion of their DTL for
government or other approved securities.
 It has therefore a deflationary impact on the
economy not only by reducing the supply of
loanable funds of banks, but also by increasing the
lending rate in the face of an increasing demand
for bank credit.
 Reverse phenomena happens in case of cut in SLR.
Key difference between CRR & SLR
CRR
1.CRR is the percentage of money,
which a bank has to keep with
RBI in the form of cash.
2. CRR regulates the flow of money 2. SLR ensures the solvency of the
in the economy.
Banking company is required to
maintain a specific percentage
of their net demand and time
liability as cash balance with RBI
3. A cut in CRR enhances loanable
funds with bank and reduces
SLR
1. SLR is the proportion of liquid
assets to time and demand
liabilities.
banks.
Liquidity – A firm’s ability to meet
its short – term obligations.
Solvency – A firm’s ability to
sustain its activity into the long -
term. Solvency is the ability of a
bank to meet its long term debt
and financial obligation.
3. A cut in SLR by RBI is the
enhancement in the lending
CRR & SLR with reference to computation
 Concept of CRR and procedure with reference to
computation:-
 As per Sec. 42 of the RBI Act, 1934, liabilities of a bank
may be towards the banking system or towards other in
the form of demand and time deposits or borrowing or
other miscellaneous items of liabilities.
 The RBI has been authorised in terms of Sec. 42(1C) of
RBI Act, 1934, to classify any particular liability and
hence for any doubt regarding classification of a
particular liability, banks may approach the RBI for
necessary clarification.
 Maintenance of CRR on Daily Basis:
With a view to providing flexibility to banks in
choosing an optimum strategy of holding reserves
depending upon their data fortnight cash flows all
Commercial Banks are required to maintain minimum
CRR balances up to 95% of the average daily
reserved for a reporting fortnight on all days of the
fortnight with effect from the fortnight beginning
September 21,2013.
Penalties in case of default to maintain CRR

 Penal interest will be charged as under in cases of

default in maintenance of CRR by SCBs:
• In case of default in maintenance of CRR requirement on a
daily basis, that is presently 95% of the total CRR requirement
,penal interest will be recovered for that day at the rate of 3%
per annum above the bank rate.
• If the shortfall continues on the next succeeding days, penal
interest will be recovered at the rate of 5% per annum above
the bank rate.
 CRR for Lending purpose

 Cash reserve Ratio (CRR) is the amount of Cash that the

banks have to keep with RBI. This Ratio is basically to secure
solvency of the bank and to drain out the excessive money
from the banks. For example, if you deposit Rs 100 in your
bank, then bank can't use the entire Rs 100 for lending or
investment purpose. They have to maintain a certain
percentage of their deposits in the form of cash and can use
only the remaining amount for lending/investment. This
minimum percentage which is determined by the central bank
is known as Cash Reserve Ratio.
 Thus, when a bank's deposits increase by Rs 100, and if the
cash reserve ratio is 9%, the banks will have to hold additional
Rs 9 with RBI and Bank will be able to use only Rs 91 for
investments and lending or credit purpose.
 Higher the CRR ratio is, lower will be the amount available with the
banks for lending and investment purpose and vice versa. RBI uses this
tool to curb inflation and to control excessive liquidity in the market.
 Statutory Liquidity Ratio (SLR) Apart from keeping a portion of deposits
with the RBI as cash, banks are also required to maintain a minimum
percentage of their net demand and time liabilities with them at the
end of every business day, in the form of gold, cash, government
bonds or other approved securities. This minimum percentage is called
Statutory Liquidity Ratio.

Example: If you deposit Rs. 100/- in bank, CRR being 9% and SLR being
11%, then bank can use 100-9-11= Rs. 80/- for giving loan or for
investment purpose.
 With a view to monitoring compliance of maintenance of statutory reserve
requirements viz. CRR and SLR by the SCBs, the Reserve Bank of India has
prescribed statutory returns i.e. Form A Return (for CRR) under Section
42(2) of the Reserve Bank of India (RBI) Act, 1934 and Form VIII Return (for
SLR) under Section 24 of the Banking Regulation Act, 1949.
 Incremental CRR
 In terms of Section 42(1A) of RBI Act, 1934, the SCBs are required to
maintain, in addition to the balances prescribed under Section 42(1)
of the Act, an additional average daily balance, the amount of which
shall not be less than the rate specified by the Reserve Bank in the
notification published in the Gazette of India from time to time.
Such additional balance will be calculated with reference to the
excess of the total of DTL of the bank as shown in the Returns
referred to in Section 42(2) of the RBI Act, 1934 over the total of its
DTL at the close of the business on the date specified in the
notification.
 Time Liabilities
 Time Liabilities of a bank are those which are payable otherwise than
on demand. These include fixed deposits, cash certificates, cumulative
and recurring deposits, time liabilities portion of savings bank
deposits, staff security deposits, margin held against letters of credit,
if not payable on demand, deposits held as securities for advances
which are not payable on demand and Gold deposits.
 Assets with the Banking System
 Assets with the banking system include balances with banks in current
account, balances with banks and notified financial institutions in
other accounts, funds made available to banking system by way of
loans or deposits repayable at call or short notice of a fortnight or less
and loans other than money at call and short notice made available to
the banking system. Any other amounts due from the banking system
which cannot be classified under any of the above items are also to be
taken as assets with the banking system.
 Procedure for Computation of CRR
 In order to improve cash management by banks, as a measure of
simplification, a lag of one fortnight in the maintenance of stipulated CRR by
banks was introduced with effect from the fortnight beginning November 06,
1999.
Maintenance of CRR on Daily Basis
 With a view to providing flexibility to banks in choosing an optimum strategy
of holding reserves depending upon their intra fortnight cash flows, all SCBs
are required to maintain minimum CRR balances up to 95 per cent of the
average daily required reserves for a reporting fortnight on all days of the
fortnight with effect from the fortnight beginning September 21, 2013.
 No Interest Payment on Eligible Cash Balances maintained by SCBs with RBI
under CRR
 In view of the amendment carried out to RBI Act 1934, omitting sub-section
(1B) of Section 42, the Reserve Bank does not pay any interest on the CRR
balances maintained by SCBs with effect from the fortnight beginning March
31, 2007.
 Fortnightly Return in Form A (CRR)
 Under Section 42(2) of the RBI Act, 1934, all SCBs are
required to submit to Reserve Bank a provisional Return in
Form 'A' within 7 days from the expiry of the relevant
fortnight which is used for preparing press communiqué. The
final Form 'A' Return is required to be submitted to RBI within
20 days from expiry of the relevant fortnight. 
Procedure for Computation of SLR
The procedure to compute total NDTL for the purpose of SLR under Sec.
24(2A) of Banking Regulation Act, 1949 is broadly similar to the procedure
followed for CRR.
Scheduled Commercial Banks are required to include inter – bank term
deposits & term borrowing liabilities of all maturities in ‘Liabilities to the
banking system’.
Similarly, banks should include their inter-bank assets of term deposits and
term lending of all maturities in 'Assets with the Banking System' for
computation of NDTL for SLR purpose .

Penalties- If bank fails to maintain the required amount of SLR, it shall be

liable to pay to RBI in respect of default,the penal interest for that day at the
rate of 3% per annum above the Bank Rate on the short fall and if the default
continues on the next succeeding working day, the penal interest may be
increased to 5% Per annum above the Bank Rate for the concerned days of
default on the shortfall.
 Classification and Valuation of Approved Securities for SLR
 As regards classification and valuation of approved securities,
banks may be guided by the instructions contained in our
Master Circular (as updated from time to time) on Prudential
Norms for Classification, Valuation and Operation of
Investment Portfolio by banks.
 Return in Form VIII (SLR)
 i) Banks should submit to the Reserve Bank before 20th day
of every month, a Return in Form VIII showing the amounts of
SLR held on alternate Fridays during immediate preceding
month with particulars of their DTL in India held on such
Fridays or if any such Friday is a public holiday under the
Negotiable Instruments Act, 1881, at the close of business on
preceding working day.
 ii) Banks should also submit a statement as Annexure to Form
VIII Return giving daily position of (a) assets held for the
purpose of compliance with SLR, (b) excess cash balances
maintained by them with RBI in the prescribed format, and (c)
mode of valuation of securities.
 Correctness of computation of DTL to be certified by
Statutory Auditors
 The Statutory Auditors should verify and certify that all items
of outside liabilities, as per the bank’s books had been duly
compiled by the bank and correctly reflected under
DTL/NDTL in the fortnightly/monthly statutory returns
submitted to Reserve Bank for the financial year.